Labor Supply Responsiveness to Tax Reforms

Labor supply responses constitute real responses to taxation and are central for policy analysis. This paper estimates the elasticity of labor supply at the intensive margin by applying conventional estimation strategies from the elasticity of taxable income (ETI) literature to administrative register data on performed hours of work. The elasticity is estimated to be 0.08, significant, and can be attributed to individuals changing main and secondary employment, a general increase in contract hours, and a reduction in paid absence. By also estimating ETI, which captures all responses to taxation, I show that a large part of total responses can be attributed to individuals adjusting work hours, capturing inherent labor responses, and I thereby provide a link between the labor and public finance literatures. These findings suggest that contextual factors such as labor market fluidity and flexibility are important to facilitate real responses to taxation and that labor supply responses are core underlying drivers of total responses to taxation.